The New New Deal

by Grunwald, Michael

  The rest of the answer is that the Recovery Act wasn’t big enough to fill that giant hole in demand. As Biden says, it was never supposed to carry the whole sleigh. The December 2008 memo from Obama’s economic team acknowledged that it would plug less than half the output gap, and the team seriously underestimated that gap. Ultimately, the Recovery Act’s fiscal expansion didn’t even offset the contraction by state and local governments, and getting Congress to approve more stimulus turned out to be much harder than the team expected. For all the vitriol about Obama’s new era of big government, the United States has shed over half a million public sector jobs during his presidency, or about two thirds of the government jobs added during the Bush era. This has prompted some liberals to complain that Keynesian stimulus was never tried; a more charitable reading is that Keynesian stimulus prevented even harsher anti-Keynesian cuts in the public sector. Meanwhile, the economy has added private sector jobs every month for two years, corporate America has enjoyed record profits, and the stock market has recovered its losses. It’s an odd brand of socialism.

  The Republican counterargument is simple: Unemployment is too high and the deficit is too big, so Keynes was wrong and the stimulus failed. Of course, Republicans supported Bush’s stimulus in 2008 when unemployment was only 5 percent; most of them supported the concept of a stimulus in 2009; and Obama inherited a $1.2 trillion deficit that has not increased on his watch. So the partisan critiques seem awfully convenient. Republicans say they’re worried about borrowing, but borrowing costs are historically low. They never seemed to worry about borrowing during the Bush era, and they’re still happy to borrow to finance high-end tax cuts. The Recovery Act’s impact on the national debt was negligible compared to the impact of the Bush tax cuts or the Great Recession. Yet the GOP, after frittering away the Clinton surplus and leaving the economy in a ditch, has trashed Obama for putting the emergency tow on the Treasury’s credit card.

  The sudden Republican horror that federal spending is “crowding out” private investments also seems curiously timed. For example, Romney, who launched a Green Energy Fund to seed start-ups in Massachusetts, has accused Obama of “killing solar energy by having the government play the role of venture capitalist.”407 That’s precisely backward; the U.S. solar industry was on the brink of death before the Recovery Act, but it has expanded sixfold over the last three years.408 While crowding out is a legitimate concern, there was probably less danger of it during the capital strike of early 2009 than at any time since the Depression. The Recovery Act actually “crowded in” private investments through matching requirements, which drew more than $100 billion in clean-energy funding off the sidelines at a time when hardly anyone was investing in anything.

  The bottom line is that the Keynesian story line fits the facts of the last few years. With the economy in a death spiral, the federal government stepped in as the spender of last resort, providing enough fiscal impulse to reverse the slide but not enough to revive a shattered labor market in a hurry. By contrast, the Republican “cut-and-grow” story line makes little sense. In an economy without demand, spending cuts kill jobs and growth. As Romney explained in one of his off-message campaign moments: “If all you’re thinking about doing is cutting spending, as you cut spending you’ll slow down the economy.” Governor Sanford at least made an honest case for short-term austerity, arguing that the immediate pain would produce long-term gain. But when demand is slack, more pain means fewer jobs, less revenue, and bigger deficits. And pain hurts.

  The Recovery Act helped ease a lot of pain, and helped avert a depression that would have caused immeasurable pain. Remember, in the fourth quarter of 2008, the economy withered at an 8.9 percent annual rate. At that pace we would have shed an entire Canada’s worth of output in 2009. Modest growth, while frustrating, has been infinitely preferable to hellacious contraction. Like Romer said: Depressions really, really suck.

  The Obama economy hasn’t been fun, either. You don’t have to believe in austerity fantasies or supply side fairy tales to wonder what the president could have done to make the last three years suck less, or how the Recovery Act could have been improved. But even nonpartisan critiques have often ignored the political and economic constraints that Obama has faced. He’s not the king—or the Almighty.

  Progressives still complain that Obama’s stimulus should have been bigger. Just about every economist who ever worked for Obama agrees. But Congress wasn’t going to give him a bigger stimulus after the backlash over the financial bailout. The absolute maximum for the three Republican defectors and at least half a dozen Senate Democrats was $800 billion. Similarly, it’s true the Alternative Minimum Tax fix didn’t belong in the stimulus. Obama’s economists always said it wasn’t stimulus, and shifting that $75 billion to state aid or construction projects might have sliced a half point off the jobless rate. But Senator Snowe insisted on including it, and key Democrats wanted it, too. Obama correctly calculated that a $787 billion stimulus diluted by the AMT fix would provide a greater economic jolt than a filibustered stimulus that died in the Senate.

  The most glaring example of magical thinking is the conventional wisdom that Obama should have split the Recovery Act into a short-term save-the-economy stimulus bill and a long-term change-the-economy investment bill. Surely that would have united Washington! Uh, no. The short-term bill might have passed, although the assumption that Republicans would have embraced it deeply misreads Republicans, and the assumption that Democrats would have agreed to start the Obama era with more tax cuts rather than clean energy, health care, education, or infrastructure is a stretch as well. In any case, unemployment would have kept rising, an outcome already baked into the economic cake, and the long-term bill stuffed with Obama’s campaign priorities would have gone nowhere. Every Republican would have opposed it, and quite a few centrist Democrats also would have refused to support another spending bill, especially another spending bill that wasn’t even designed to address the short-term jobs crisis. The result would have been much less overall stimulus, a possible double-dip recession, none of the Recovery Act’s Change We Can Believe In, and, since Senator Specter presumably would have remained a Republican, no Obamacare.

  While complaints about the Recovery Act’s size tend to ignore political realities, complaints about its contents often gloss over economic realities, exaggerating the impact that modest tweaks or even major rewrites could have had on jobs and growth. There were legitimate arguments for including more of this and less of that, but there was only so much stimulus Obama could have produced with a $787 billion package.

  For instance, some critics wanted more support for the economy in 2009. That would have required more tax cuts, which would have weakened the overall stimulus and infuriated many Democrats, or more state aid, which wouldn’t have made it through Congress. Other critics wanted more infrastructure projects, which have high bang for the buck, and might have attracted a few votes from House Republican concrete lovers, but weren’t shovel-ready enough to produce many jobs in 2009. Some argued that longer-term investments like high-speed rail and health IT didn’t belong in the stimulus, since they barely got started before 2011, but as it turned out the economy still needed stimulus in 2011. Others questioned whether random spending on crime victims, wildfire management, and floodplain easements really produced stimulus; the answer is yes, although somewhat less than more targeted spending. Anyway, those programs comprised less than 0.1 percent of the bill.

  The larger point is that reshuffling the Recovery Act might have helped at the macroeconomic margins, but it wouldn’t have changed the narrative. Personally, I would have liked to see aid to help transit agencies avoid fare hikes and service cuts, and more tax incentives for energy efficiency improvements; I’m less enthusiastic about the Recovery Act’s “unparalleled investments” in rural housing, rural broadband, and other sprawl-inducing goodies for rural communities. But I’m under no illusion that my ideal $787 billion package would have produced a much better
economy than the actual $787 billion package.

  A more compelling critique of the Recovery Act is that it was a hodgepodge. It did throw cash at just about every problem imaginable, from lead paint to invasive carp to leaking underground storage tanks. It was like the Blob, seeping into every sector of society. Even I didn’t realize until recently that it’s funding a $49 million rail tunnel to the Port of Miami, about a mile from my home. It was mostly big-ticket items, but it included enough cats and dogs—$50 million for the National Cemetery Administration, $20 million for radios for immigration officers, $10 million for urban canals—to make messaging a real challenge. Distributing the cash through fewer channels and a handful of marquee initiatives might have been better politics.

  It wouldn’t have been better stimulus, though. Diminishing returns are a real problem; the more money a program has, the longer it takes to spend. Congress could have shifted that $50 million for repairing monuments at national cemeteries into larger pots for repairing roads or federal buildings, but the top project on the cemetery list was a lot more likely to be shovel-ready and shovel-worthy than the 14,001st road project or the 301st federal building project. So spreading the spending around made sense. Inevitably, there were still dubious expenditures—new runways at little used airports, costly broadband connections in the Alaskan tundra, $10,000 for the Colorado Dragon Boat Festival. The incorrigible Army Corps of Engineers is spending $50 million to build wing dikes and weirs along the Mississippi River, despite mounting evidence that these “river improvements” make floods worse.409 But even dumb projects provide stimulus.

  The bottom line is that the tepid growth of 2010 and 2011 was not the Recovery Act’s fault.

  Was it Obama’s fault? You’d never know it from the cult-of-the-presidency media, but he doesn’t control every bob and weave of the economy. Obama couldn’t stop the Japanese tsunami or Arab Spring or Greek crisis from dragging down U.S. growth any more than he could plug that hole in the Gulf. The Fed has more power to manipulate the economy in the short term through monetary policy, but it’s independent of the White House.

  The leader of the free world does help set fiscal policy, in conjunction with 535 difficult congressional partners, not to mention the modern-day Hoovers who inhabit so many statehouses. Some liberal economists will never forgive Obama for pivoting from gas to brakes instead of following up the Recovery Act with more stimulus. But he did follow up the Recovery Act with nearly $700 billion more stimulus: tax cuts for families and businesses, state aid to prevent teacher layoffs and Medicaid cuts, unemployment benefits, and much more. Not all of it was ideal stimulus; he would have preferred not to extend the Bush tax cuts for the rich in the lame-duck deal. But it all helped prevent economic backsliding. The notion that he gave up on gas ignores a dozen fiscally expansive bills he extracted from a reluctant Congress. And the deals he cut with austerity-mad Republicans in 2011 to avoid closing the government or welshing on national debts were remarkably free of short-term anti-stimulus. The left still accuses him of caving to the Tea Party, but it’s hard to win a game of chicken outright when your opponents don’t fear a crash.

  It’s true that even more stimulus would have been even more helpful. Obama tried to get more, but there weren’t sixty votes for more state aid or a bigger hiring tax credit, much less a new stimulus bill like the American Jobs Act. The Senate wouldn’t even extend unemployment benefits after Robert Byrd died. This was often portrayed as a failure of leadership, as if a more forceful commander in chief would have gotten his way, as if members of Congress are powerless bystanders in a presidential psychodrama. Obama did shift focus from jobs to health care in spring 2009, and the gas-versus-brakes bickering among his economists probably did prevent a more coherent jobs message in fall 2009. But it’s not clear how a more intense focus or a more coherent message would have changed the political calculus for stimulus. Generally, the more Obama talks about things he wants—from the American Jobs Act to the Chevy Volt—the more politically toxic they become. And if he hadn’t prioritized health care, he wouldn’t have passed his historic reforms.

  Obama certainly made mistakes. Scuttling the transportation bill in 2009 was a blunder, a missed opportunity to create jobs, fix infrastructure, and ensure the survival of high-speed rail, quite possibly with bipartisan support. I’m more sympathetic to Obama’s much maligned decision to reappoint Bernanke—the guy had just saved global finance—but the White House did drop the ball by leaving two vacancies on the fractious Fed board at a time when the economy was crying out for monetary stimulus. (Then again, when Obama finally tried to fill a vacancy with Nobel laureate economist Peter Diamond, Republicans blocked him, at one point deeming him “unqualified.”) And even Obama thinks his housing policies have been too timid. More aggressive action to prevent foreclosures and revive the real estate market would have been economically and politically risky, but as it turned out, so was doing too little.

  There are reasonable explanations for most of Obama’s economic policies. He didn’t do more stimulus because he didn’t have the votes for more stimulus. He didn’t do more to help foreclosed homeowners because a bailout would have been wildly expensive and unpopular, and could have made the problem worse by encouraging more homeowners to stop paying their mortgages. But it’s fair to say that somehow, he should have figured out a way to do more to relieve the pain of persistent unemployment.

  Then again, one could say the same about FDR and the New Deal before the bombing of Pearl Harbor. Context really matters. While it’s boring to keep repeating that Obama inherited an economy in shambles, he did inherit an economy in shambles, along with implacable Republican opponents and unreliable Democratic allies. Obama aide Gene Sperling explained the predicament to me one day in 2010, waxing metaphorical about his love for the Detroit Lions.

  “We were 0-16 in 2008. Then we went 2-14. If we go 8-8 this year, some fans still won’t be happy, and it’s still not good enough,” said Sperling, a Michigan native who kept a Lions helmet in his office. “But objectively, it’s way better than 0-16!”

  For the record, the Lions went 6-10 that year, but improved to 10-6 the next year. The economy’s trajectory has been similarly encouraging. There are no more pathetic words in politics than “it could’ve been worse,” but seriously, it could’ve been worse.

  Beyond the *#~@ Show

  From the start, Obama insisted that his new New Deal should be about reshaping the economy as well as juicing the economy. His critics on the left and the right say he was insufficiently “focused” on the economy’s short-term needs. But those needs were pretty simple—more demand—and Obama believed the economy would never produce sustainable long-term growth until its long-term needs were addressed. As Obama often said, a president needs to be able to walk and chew gum at the same time, and after campaigning for change, he managed to slip a lot of it into the Recovery Act.

  For example, the Recovery Act didn’t just provide unemployment benefits to millions of Americans in need. It also pushed thirty-nine states to rewrite their eligibility rules in order to qualify for stimulus bonuses, dragging the New Deal–era unemployment system into the computer age, permanently extending the countercyclical safety net to part-time workers and domestic abuse victims.410 Similarly, HUD has incorporated the Recovery Act’s homelessness prevention strategy into its emergency shelter program on a permanent basis, and the VA has launched a similar program for veterans.

  The most ambitious stimulus investments focused on clean energy, and they’re already generating long-term returns. So far, the Recovery Act has financed the weatherization of 680,000 low-income homes, energy efficiency retrofits of 120,000 buildings, and the installation of ten million smart meters. The energy savings from these projects will recur automatically every year; they’re not like new coal plants, which have to burn more coal to produce more energy. Meanwhile, as promised, renewable electricity doubled during Obama’s first three years, while the number of wind, solar, and geothermal
projects approved on federal land increased from zero to twenty-nine.411 Those projects alone will have the capacity of a dozen coal plants, and another seventeen projects that could displace another dozen coal plants are in the pipeline. Even without cap-and-trade or a price on emissions, the United States has begun a transition toward a low-carbon economy.

  “Right now, we’re being judged on jobs,” the Energy Department’s Matt Rogers once told me. “In a decade, we’ll be judged on whether we transformed the economy.”

  First, though, they would be judged on a single failed solar investment.

  Solyndra’s new glass-and-steel plant had five times the floor space of the White House. When I visited in June 2011, robots were cranking out tubular solar cells and mounting them on rectangular racks through an impossibly complex nineteen-step process—casting, coating, “sputtering,” and so forth. Driverless dollies were whipping materials around the factory floor, playing peppy music to alert human beings to stay away. My hosts boasted that almost every machine was custom-made. I told them the factory felt a bit too awesome; solar panels didn’t usually require such an elaborate production. In retrospect, it was also an odd use of prime Silicon Valley real estate.

  At the time, though, the company seemed to have its groove back. “The reports of Solyndra’s death have been greatly exaggerated,” I wrote in an idiotic blog post.412 (In my quasi-defense, I did add: “Of course, Solyndra could still fail. Energy is a ruthlessly competitive market, and solar is getting particularly Darwinian.”) It was having its best quarter ever, and was on track for over $200 million in revenues for 2011, up from $6 million in 2008. After the hubbub over its R&D layoffs, it had quietly doubled its sales and marketing staff, and it was still hiring. It had completed projects for Coca-Cola, Frito-Lay, and Costco, and had just signed a huge deal to supply panels to a California utility. It had cut its costs in half, and expected further reductions as it ramped up production. “You can see that we’ve changed,” CEO Brian Harrison said. He told me Solyndra would be profitable by 2012, and that summer he told Congress the same thing.